At the opening hearing of the Financial Crisis Inquiry Commission held in Washington this week, key players in the worst financial meltdown since the Great Depression admitted they did not see it coming. The chairmen and CEOs of JPMorgan Chase and Goldman Sachs, Jamie Dimon and Lloyd Blankfein, and the chairman of Morgan Stanley, John Mack (who used to be its CEO as well) all testified that they were surprised at what happened. They now agree they were overly leveraged and did not handle risk with the respect it deserved. Mr. Dimon apparently never contemplated the possibility that housing prices would stop rising, much less decline.
It seems that Messrs. Dimon, Blankfein and Mack had as much vision in anticipating the downturn, and the folly of some of their assumptions about growth, as over- extended buyers of subprime mortgages had. Except that Dimon, Blankfein and Mack were not struggling low-income homebuyers who took on one too many bedrooms. They were among the highest paid executives on the planet whose word commanded deference and awe among much of the investing public, the media and an ever-admiring circle of policymaker-groupies.
Over the five years leading up to the subprime debacle in 2008, these three men were collectively paid more than $310 million. For the year 2006 alone, when so many of the seeds of disaster were being sewn on Wall Street and among its top banks, Mr. Dimon was paid $57 million and Mr. Blankfein $38 million. When Mr. Mack rejoined Morgan Stanley in June 2005, he was awarded stock worth $26 million on day-one, and a further $13 million in compensation and benefits for his first five months of work. In December of 2006, Mr. Mack was awarded a bonus of $40 million on top of his $1.4 million salary.
As they were being paid these sums, much of the world was increasingly convinced that these were proper incentives to ensure alignment with shareholder interests. They earned every penny million, it was thought. The prevailing view, especially among the wishful thinking and the non-thinking alike, was that such men were really superheroes whose ability was so unique and so far beyond those of ordinary mortals, the fact that their feet touched the ground when they walked was seen merely as one of their many generous concessions to convention.
They were not alone, of course. There have been hundreds of CEOs who have happily participated in the greatest transfer of wealth of its kind –a transfer that, for all the soaring salaries, bonuses and stock options, has ultimately seen the worst economic crisis since the 1930s, the highest job losses in generations and a stock market performance over the past ten years that has produced virtually zero gains, except for the titans and bankers who managed to cash out before the fall.
The 21st century began with a series of corporate scandals involving companies like Enron, WorldCom, Tyco and Hollinger. It ended its first decade in the throws of the worst financial failure in modern time. One thing stands out to mark the beginning of this period and its end: the folly of executive compensation. In 2002, we warned Congressional committees: “The most corrosive force in modern business today is excessive CEO compensation. Such lofty sums tempt CEOs to take actions that artificially push up the price of the stock in ways that cannot be sustained, and to cash out before the inevitable fall.” The extent of that corrosion and fall is apparent today. The consequences in taxpayer dollars soar into the trillions. The costs in human terms remain beyond calculation, as does the loss of confidence in corporate leadership.
More than just Lehman Brothers, a few banks and a couple of Detroit automakers went bankrupt in this period. The trust of workers, the middle class and pensioners in corporate management and governance has also collapsed. There may be a seismic ruin of jobs, dreams and foreclosed homes on Main Street. But on Wall Street, where people like Mr. Dimon, Mr. Blankfein and Mr. Mack still command adulation for their leadership and vision, the Fed-supported, taxpayer-rescued towers of finance give hope and comfort to those still requiring generous bonuses to get through their Tiffany-challenged day. The magnitude of their gains this year, less than 18 months from a once- in-a-lifetime experience looking into the abyss, promises also to set new records, which, like housing prices, is something Mr. Dimon thinks should go only one way, too. Recently, he announced that he was sick and tired of the criticism being leveled against Wall Street on the compensation front.
These are forceful accelerants to the rise of Turbo Populism, the term we coined on these pages and will be speaking more about in the future.
Had the world the benefit of a modern Churchill capable of battling the monstrosity of betrayal and failure these titans of excess have wrought, he would surely have given voice to a mood that is thundering across the land from kitchen tables and church pews to swelling unemployment lines and Twitter postings: Never in the history of modern business leadership have CEOs been paid so much to achieve so little at such cost to so many.
This is a reality that escaped the CEOs who appeared before the Congressional committee this week. They do not escape our sense of outrage.